Postcards: "Fear and Loathing on the Mexico Border"
One man's ill-fated decision in 1851 is the setting for the growth of the modern prison system in America. It's a story of incentives... and what's coming next to the U.S.
Market Update: As you’ll see below, I’m reworking a research project all this week, and I wanted to dive in as soon as possible. NVIDIA did what we largely expected on Monday, pulling higher - but now it’s back under pressure and shares are down 1.5% to start Tuesday. It appears that a risk has reemerged in the regional banking sectors. A new report by Klaros Group signals that 280 U.S. banks are facing pressure due to commercial real estate and losses linked to interest rates. Remember - it doesn’t matter if they’re really a threat - it matters if the short sellers start to pile up again and we have another social media driven bank run. The Fed will back up the banks - it’s inevitable. But bank runs aren’t rational - as we witnessed last year. The winners in this situation are always the Too Big to Fail banks like JPMorgan Chase (JPM).
Dear Fellow Expat:
Robert Percy probably wished the whole damn city burned down.
In May 1851, a Great Fire scorched three-quarters of San Francisco.
During the Gold Rush, hauling wood over the Rocky Mountains or around South America was expensive. Builders took shortcuts in the city's rapid construction.
They often sourced untreated wood from abandoned ships in the ports.
This practice turned the city into a tinderbox.
Long Wharf was one of the few areas spared by the ‘51 fire. It was a half-mile stretch from present-day Chinatown to the anchored steamers in today’s East Bay.
Here, Percy and his colleague Peter Caserty celebrated America's 75th Birthday.
On July 4, 1851, the spirit of freedom—and alcohol—flowed freely.
Caserty, flush with money from a recent job, had $40 in cash and a $250 check from banking house Burgoyne & Co.
Percy was "five feet and three-quarters of an inch tall," state records note.
The shorter man convinced his taller, drunken friend that the money would be safer with him during the celebrations.
Caserty obliged.
Some friend.
Percy soon took the money to the El Dorado, a lavish gambling house in Portsmouth Square.
He gambled away the $40 in cash at the Faro tables. Not content with the loss, he forged Caserty's signature to cash the $250 check, hoping to recoup his losses.
With that forged signature, Percy also sealed his fate. The next day, Caserty's hangover lifted.
Though not recorded, the confrontation between the two men must have been a sight.
Captain S.C. Harding soon apprehended Percy on the charge of larceny.
A week later, a jury condemned him to “the mercy of the court.”
Mercy was absent from sentencing. The California Department of Corrections and Rehabilitation says Percy was the twelfth man swallowed by California’s new penal system.
His sentence, surprisingly (and dare we say ‘progressively’), was not the end of a rope.
Instead, Percy received a one-year sentence aboard a prison ship called The Waban.
The record above shows the intake and sentencing of the State’s first prisoners - about half of them foreign men. Most inmates had physical or laborer occupations at the time of arrest.
Why kill able-bodied men like Percy, who could provide cheap labor to the state?
California was broke… and it had no physical prisons.
Ideas on how to profit from prisoners quickly evolved.
Two men, Mariano Vallejo and James Estell, proposed no-cost prison construction using prisoner labor. The financially desperate state approved. And for the prisoners listed above, their hands would forge the foundation of the American private penal system.
Percy spent his days working in a quarry and his nights sleeping on the Waban. He was among the first men to start the labor-backed construction of San Quentin, the state's first penitentiary.
Others, like James Burns (jailed on August 1, 1851), endured years in this exploitative system.
Prison labor would extend beyond building their own prisons. All across America, prisoners would later harvest crops, build public roads, dig canals, and construct other infrastructure.
Chain gangs would do more than just clean up roads like today.
And with states eager to profit off the backs of prisoners… the model was naturally to arrest more people.
Incentives Matter
The model of prison labor became a sweeping economic phenomenon across America in the 19th century, especially after the Civil War ended slavery.
In 1883, the State of Alabama generated about 10% of its revenue from leasing prison labor around the state.
By 1898, that figure surged to 73% of state revenue.
With cheap labor filling the coffers, it naturally incentivized more arrests, prison sentences, and bastardization of the legal system. That legacy—especially the one related to false incentives—remains stitched in the fabric of certain business motivations.
More than 170 years later, social and political forces haven’t ended the use of cheap prison labor. Today, prisoners can’t make minimum wage, earn overtime, or unionize.
But the prison industry itself… has changed.
Private prisons are largely considered Taboo in America. Their business models have pivoted over the decades. Recently, their models have shifted, largely incentivized by state and Federal spending emphasizing prisoner rehabilitation and “catch and release” with significant monitoring of criminals and persons of interest.
But as you’ll soon learn, there’s a massive economic and social phenomenon that will reshape America’s prison system for the next 248 years.
When it comes to prisons…
Who needs ships?
Who needs walls or bars or hundreds of guards to monitor the incarcerated?
The new American prisoner isn’t confined to a six-by-four-foot cell with three meals daily.
That’s because the new American prison… is America itself.
Why We’re Turning to the Border
When I was 24, I wrote my first novel.
It was an exploration of drug and human trafficking on the California-Mexico border.
Nothing has changed in America or government… except for profit potential on a trend that I recognized in a small town called Campo, California in August 2005.
The secondary character was based on Craig Vetter, a Playboy magazine write
r who once lived with author Hunter S. Thompson in San Francisco.
Although it was called “Borderline Behavior” - the publishing houses that rejected it called it “Fear and Loathing on the Mexican Border” - a nod to Thompson’s famous book “Fear and Loathing in Las Vegas” and his anti-Nixon publication “Fear and Loathing on the Campaign Trail” - in their letters to me.
The book never went far… but it sits behind my desk… a reminder to revisit great ideas. And here we are, 20 years later.
So - I’ll be diving this week into an opportunity that has caught my attention - one I plan to share with my Republic Risk Letter readers in two weeks (April 2) - my birthday.
It’s a story of massive government incentives, billions in spending, and an alternative investment opportunity that is happening right now in our government appropriations bills.
It’s why more migrants will stream across the border in 2024… and beyond.
The U.S. government could have built a wall and have largely been done with the issue.
All for about $24 billion.
But nah - instead we’re going to spend hundreds of billions on the migration problem over the next decade. - because that’s the American way.
I’m digging into the research this week - and I’ll circle back with Republic readers.
While these markets give me a bit of pause - and I fear a negative Equity signal in the next two weeks - I just want to let you know where I’ll be focused.
You can get your copy - on April 2 with a simple one-month subscription.
That research will accompany a recommendation for our current model portfolio.
Finally, remember that the Fed has an announcement tomorrow.
I’ll send out my thoughts and recommendations about Powell’s speech and how to protect your money over the next few months.
Stay positive,
Garrett Baldwin
Secretary of Finance
You’re the best G….
Garrett, I’ve asked about this before but I’ll be damned if I can find the email….
A while back you gave a break-down of how the market reacts on “Fedspeak Days”…the first half hour I think an up move and then a slow bleed negative for the rest of the day…am I remembering correctly or was it the opposite?
If you could post a recap I would love it…you were spot on even if my memory is lacking🙃
I realize it depends on how negative Powell is or somewhat positive which I realize is a stretch. Last speech I believe the market went straight up after his talk….again there have been so many I’m probably conflating several😂